I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But some growth stories are inevitably better than others. Hence this regular series. My goal? Out the Fakers, elevate the Breakers, and examine the growth stories stuck in between.

Next up: Logitech (Nasdaq: LOGI). Is this creative computer peripherals maker growing sustainably enough for your portfolio? Let's get right to the numbers.

Foolish facts



CAPS rating (5 max) ***
Total ratings 940
Percent bulls 96.1%
Percent bears 3.9%
Bullish pitches 124 out of 131
Highest rated peers Concurrent Computer, Key Tronic, Super Micro Computer

Data current as of Feb. 21.

If you're at all like me, you've already had years of experience with Logitech. You either know its mice (raises hand), keyboards, webcams, headsets (raises hand), or its television remote controls. The Swiss electronics specialist has been helping computer users get more done since the 1980s, when it was among the first to mass market the mouse that helped make the Mac famous.

Logitech is known for enhancing gadgets others invent. Douglas Engelbart created the forerunner to the modern computer mouse in the 1960s. The keyboard replicates typewriter keys. Microphones, too, have been around for decades. Let others invent new gear; Logitech will simply make it better.

Consumers prefer the Logitech touch. The company's pristine balance sheet showed $460 million in cash and investments versus zero debt as of December, no doubt the result of nine consecutive years of producing excess free cash flow.

Trends also favor Logitech. When Google (Nasdaq: GOOG) executives saw that consumers would need gear to fully take advantage of the company's interactive TV service, they asked Logitech to become a partner. The Revue set-top box is the result of that collaboration.

Interactive TV may be a nascent market today, but it's growing fast. Netflix (Nasdaq: NFLX) increased its subscriber count 62% last year to more than 20 million. Consumers are becoming more acclimated to more interactive streaming and Internet interaction through their televisions.

The elements of growth



FY 2010

FY 2009

Normalized net income growth 278% (40.2%) (51.2%)
Revenue growth 26.6% (11.0%) (6.8%)
Gross margin 36.1% 31.9% 31.3%
Receivables growth 35.2% (8.7%) (42.7%)
Shares outstanding (million) 178.0 175.2 179.5

Source: Capital IQ, a division of Standard & Poor's. *Trailing 12 months.

So there's no shortage of growth opportunities for Logitech to capitalize upon. Will the company make good? I'm optimistic after looking at the numbers. Let's review:

  • Growth investors like me love straight-line accelerating revenue growth leading to accelerating profit growth. Here, we don't have perfect symmetry, but it's close. Revenue growth has soared since fiscal 2009 and profits, after taking a brief turn for the worse last year, are rising again. A healthy jump in return on capital over the same period suggests this isn't gimmick growth -- i.e., fueled by share buybacks or acquisitions -- but largely organic gains.
  • Pricing power is also something we like to see. Or, in lieu of that, excellent cost management leading to higher margins. Logitech is also excelling here. Gross and net margin have improved steadily since fiscal 2009 due to cost cuts.
  • We also like businesses that collect quickly. No business is perfect, and this is one area where Logitech needs improvement: Receivables grew faster than revenue over the past year. Fortunately, the mismatch doesn't seem to have affected the company's ability to collect cash. Logitech's cash conversion cycle -- a measure of its ability to transform raw materials and inventory into cash -- fell from 45.2 days in fiscal 2010 to 28.8 days over the last 12 months.
  • Finally, dilution hasn't been an issue. Logitech has fewer shares outstanding today than it did in fiscal 2009.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

Logitech (17.2%)
Microsoft (Nasdaq: MSFT) 4.2%
Philips Electronics (NYSE: PHG) (2.3%)
Plantronics (NYSE: PLT) 19.7%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Feb. 21.

Logitech hasn't been a long-term grower. Rather, it's a turnaround play that my colleagues over at Motley Fool Hidden Gems singled out in 2009. They've been rewarded with a 63% gain so far but given time this could become a multibagger. Logitech is too good a brand with too many good partners operating at the center of a high-growth market. What's not to like?

Grade: Sustainable
Even the price looks reasonable. As of Friday's close, shares of Logitech traded for 22 times fiscal 2011 estimates. Not bad for a company on pace to more than double profits this fiscal year and which, according to Yahoo! Finance data, has beaten Wall Street's expectations in three of the past four quarters.

Do you agree? Disagree? Let us know what you think about Logitech's products, valuation, and competitive positioning using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Logitech, Microsoft, Philips Electronics, or Plantronics to your watchlist.

Google and Microsoft are Motley Fool Inside Value picks. Logitech is a Motley Fool Hidden Gems recommendation. Netflix is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended members write Logitech covered calls and open a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google, Logitech, and Microsoft. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.